Timing of Plan Contributions – Safe Harbor Myths and Truths

The timely remittance of employee-withheld contributions to retirement plans is a top enforcement priority for the Department of Labor (DOL), yet many plan sponsors do not understand when those contributions are due.

MYTH: Many employers believe that they are remitting amounts withheld from employee wages on a timely basis as long as those wages are remitted to the plan no later than the 15th business day of the month following the month in which the amounts would otherwise have been paid to the employee.

TRUTH: In fact, the long-standing DOL rule is that amounts withheld from employee pay must be remitted to the plan as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets. For most employers, this is a very short period of time, perhaps only two or three business days.

The absence of an objective standard has created confusion for plan sponsors and has complicated the DOL’s efforts to enforce the law.

Desiring certainty on the timing question and hoping to boost compliance, the DOL recently proposed a new regulation that would give small pension and welfare plans (plans with fewer than 100 participants at the beginning of the plan year) a seven-day safe harbor for depositing participant contributions to a plan. Under the proposed safe harbor, the employer would have seven business days to transmit participant contributions even if the employer could reasonably do so sooner. The seven-day safe harbor period would begin on the first business day after the amounts would have been paid to the employee had they not been withheld from his or her pay.

TRUTH: Sponsors of small plans can rely on the proposed seven-day safe harbor now, even though the regulations are still in proposed form.

The DOL is also considering a similar safe harbor for large plans. Initial indications are that a large plan safe harbor, if adopted, would be shorter than seven business days. We expect that the final regulations will address the issue.

FINAL TRUTH: There are serious consequences for failing to make timely remittances of employee contributions, including prohibited transaction excise taxes and personal liability for plan fiduciaries for lost earnings on late contributions. Plan fiduciaries who fail to make remittances of plan assets to a plan can even face criminal liability in more serious cases. Timing of Plan Contributions

Plan sponsors should review their existing contribution practices to ensure that employee contributions are deposited to the proper plan within the guidelines established by the existing rules and the proposed regulations.